bank, taking into account the number of subscribers served, miles of line, and plant investment. "(b) Loans under this section shall be on such terms and conditions as the Governor of the telephone bank shall determine, subject, however, to the following restrictions: "(1) No loan may be made hereunder for a period exceeding fifty years. "(2) Intermediate loans shall bear interest at a rate equal to (i) a rate determined by the Secretary of the Treasury, taking into consideration the current average market yield, during the month of May preceding the fiscal year in which the loans are made, on outstanding marketable obligations of the United States with remaining periods to maturity comparable to the average maturities of such loans, or (ii) 4 per centum per annum, whichever is lower. All other loans made hereunder shall bear interest at a rate which reflects the current average rate payable by the telephone bank on its telephone debentures, and administrative expenses and estimated losses of the telephone bank in respect of such other loans, all as determined by the Governor of the telephone bank. Intermediate loans shall not be made to a borrower which is determined by the Governor of the telephone bank, under standards to be established by the Secretary, to be capable of both paying the interest rate applicable hereunder to loans other than intermediate loans and achieving the objectives of the Federal rural telephone loan program. The authority to make intermediate loans hereunder shall terminate on June 30, 1981, or such earlier date as conversion takes place under section 610(a): Provided, That on or before July 1, 1971, the Secretary shall make a report to the President for transmittal to the Congress on the status of the intermediate loan program with recommendations concerning its continuation thereafter. "(3) Loans shall not be made unless the Governor of the telephone bank finds and certifies that in his judgment the security therefor is reasonably adequate and such loan will be repaid within the time agreed. "(4) No loan shall be made in any State which now has or may hereafter have a Sate regulatory body having authority to regulate telephone service and to require certificates of convenience and necesity to the applicant unless such certificate from such agency is first obtained. In a State in which there is no such agency or regulatory body legally authorized to issue such certificates to the applicant, no loan shall be made under this section unless the Governor of the telephone bank shall determine (and set forth his reasons therefore in writing) that no duplication of lines, facilities, or systems, providing reasonably adequate services will result therefrom. "(5) As used in this section, the term 'telephone service' shall have the meaning prescribed for this term in section 203 (a) of this Act, and the term 'telephone lines, facilities, or systems' shall mean lines, facilities, or systems used in the rendition of such telephone service. "(6) No portion of any loan loan made under this Act shall be used to finance any political activities prohibited under 18 U.S.C., sections 600, 601, 610. 611, and 612, and prior to the making of any loan the borrowing entity shall agree in writing not to engage in any such prohibited political activities during the term of such loan. If the Board of the telephone bank finds a a violation of this provision to have occurred, it shall so notify such borrower in writing and thirty days thereafter such loan shall become due and payable in full. (c) The Governor of the telephone bank is authorized to adjust the schedule of payments of interest or principal of loans made under this section upon his determination that with such readjustment there is reasonable assurance of repayment: Provided, however, That no adjustment shall extend the period of such loans beyond fifty years. "SEC. 609. TELEPHONE BANK RECEIPTS.-Any receipts from the activities of the telephone bank shall be available for all obligations and expenditures of the telephone bank. "SEC. 610. CONVERSION OF OWNERSHIP, CONTROL, AND OPERATION OF TELEPHONE BANK.-(a) Whenever after retirement of Class A stock issued to the United States has begun pursuant to section 606 (c) of this title, the total amount in stated value of Class B and Class C stock outstanding equals two-thirds of the total amount is stated value of Class A, Class B, and Class C stock outstanding, as determined by the Secretary, and if there shall then be no outstanding indebted ness of the telephone bank to the Secretary of the Treasury on notes issued pursuant to section 607 (b)— "(1) the powers and authority of the Governor of the telephone bank granted to the Administrator of the Rural Electrification Administration by this title VI shall vest in the Telephone Bank Board, and may be exercised and performed through the Governor of the telephone bank, to be selected by the Telephone Bank Board, and through such other employees as the Telephone Bank Board shall designate; "(2) the five members of the Telephone Bank Board designated by the President pursuant to section 605 (b) shall cease to be members, and the number of Board members shall be accordingly reduced to eight unless other provision is thereafter made in the bylaws of the telephone bank; "(3) the telephone bank shall cease to be an agency of the United States, but shall continue in existence in perpetuity as an instrumentality of the United States and as a banking corporation with all of the powers and limitations conferred or imposed by this title VI except such as shall have lapsed pursuant to the provisions of this title; and "(4) the authority of the telephone bank to borrow funds from the Secretary of the Treasury to enable it to pay interest or principal on its telephone debentures, as provided in section 607 (b) of this title, shall terminate as to all telephone debentures issued thereafter. "(b) When all class A stock has been fully redeemed and retired, loans made by the telephone bank shall not be subject to the restrictions prescribed in the provisos to section 608 (a) (2). "(c) Nothing in this section shall alter or restrict the power of Congress to review the continued operations of the telephone bank after all Class A stock has been fully redeemed and retired. "SEC. 611. CUMULATIVE NATURE OF TITLE VI; AMENDMENTS THERETO.-Notwithstanding anything in this Act, powers and authority provided for in this title VI shall be cumulative, and nothing herein shall be deemed to limit powers and authority provided for in any other title of this Act. The right to repeal, alter, or amend this title VI at any time is expressly reserved." SEC. 3. (a) Subsection (f) of the Rural Electrification Act of 1936, as amended, is repealed. (b) Section 201 of the Rural Electrification Act of 1936, as amended, is amended by inserting ", to public bodies now providing telephone service in rural areas", immediately after the word "areas" in the first sentence and also immediately after the word "areas" in the first proviso of the second sentence. SEC. 4. Section 201 of the Government Corporation Control Act, as amended (31 U.S.C. 856), is amended by striking "and" immediately before “(5)” and by inserting ", and (6) the Rural Electric Bank and the Rural Telephone Bank" immediately before the period at the end. SEC. 5. The second sentence of subsection (d) of section 303 of the Government Corporation Control Act, as amended (31 U.S.C. 868), is amended by inserting "the Rural Electric Bank, the Rural Telephone Bank," immediately following the words "shall not be applicable to". SEC. 6. This Act shall take effect upon enactment. (The report of the Department on H.R. 1400 follows:) DEPARTMENT OF AGRICULTURE, Hon. W. R. POAGE, Chairman, Committee on Agriculture, House of Representatives, Washington, D.O. DEAR MR. CHAIRMAN: This is in reply to your request of January 23, 1967, for a report on H.R. 1400, a bill "To amend the Rural Electrification Act of 1936, as amended, to provide additional sources of financing for the rural electrification and rural telephone programs, and for other purposes." This Department is in full accord with the objectives of the bill, which are the same as those of a similar Administration proposal submitted to the 89th Congress, Second Session, on April 13, 1966. In the course of hearings last year before the House Committee on Agriculture on the Administration proposal (H.R. 14837), a similar bill introduced by you (H.R. 14000) and other bills pro posing essentially the same type of supplemental financing arrangements for Provide REA-financed systems a means of obtaining the additional capital It is estimated that REA electric borrowers will in the next 15 years need more than $8 billion in capital-more than twice the amount they borrowed from REA in the past 15 years-to meet the power demands in their service areas. These demands, it is estimated, will almost triple in the next 15 years. REA telephone borrowers, which received loans of $1.3 billion since inception of the program in 1949, are estimated to neer more than twice this amount in the next 15 years to meet demands for communications service in their areas, including service to new subscribers, improved service, and the new services which are continually being developed in the telephone industry. Provide a credit ladder on which borrowers in both programs can climb away from their present complete dependence on the basic 2-percent financing. This will result in reduction of the cost of the REA programs to the Federal Government by reducing the appropriation burden. The multiple interest-cost plan will effectively meet borrowers' needs without impairing their ability to meet the basic program objective-full area coverage service under rates and conditions comparable to those available to urban people. The proposal, it is emphasized, is designed to supplement and not to supplant the present basic 2-percent, 35-year financing terms. These terms provided for in Titles I and II of the Rural Electrification Act, are and will continue to be needed by those systems which are still struggling to overcome basic handicaps-lower consumer density (an average 3.5 consumers per mile of distribution line on their electric systems as against an average of 34 on the lines of Class A and B commercial power systems; an average of 3.7 subscribers per mile of line on their telephone systems as against an average of 16 subscribers for independent telephone companies generally, and more than 40 subscribers for the Bell System); low revenues (only 1/15th the revenue per mile reported by the Class A and B power companies; only 6th the revenue per mile of Independent telephone companies generally, and about 1/25th of Bell System revenues per mile); the higher operation and maintenance costs associated with their operations in the thinner areas with long lines stretching over open and often rugged terrain; isolation from sources of low-cost electric power and from adequate access to the benefits of the advancing technologies of large-scale generation and extra-high voltage power transmission lines; lack of diverse and large consumers and subscribers; and raiding of their electric service areas, sometimes by the power companies which are their sole source of wholesale power supply. As the systems realize the benefits of the basic low-cost 2-percent financing in terms of furnishing area coverage service under rates and conditions comparable to those available to urban people, as they achieve lower power costs and protection of their service territories, as they improve their revenue-expense ratios, and as the economy of their service areas is strengthened, as they establish a firmer economic base of operations, they will increasingly develop the capability of paying a higher interest rate on their future borrowings. The supplemental financing plan, briefly outlined in the enclosed short summary of H.R. 1400, provides for an intermediate interest rate for those borrowers which cannot pay the full cost of money borrowed by the private money market but which have progressed beyond the need for 2-percent financing. Funds to meet the effective demand for loans at the intermediate rate will be obtained by a mix of Federal funds invested in the capital of the banks, which the bill proposes to establish, with funds raised by borrowing in the open market and by sale of bank stock. Studies made on various assumptions as to the magnitude of the supplemental financing operations and the cost of open market borrowing indicate that the banks can meet anticipated supplemental loan needs and still operate in the black. Provision is made for ultimate retirement of the Fed eral investment in the banks and for their conversion to full ownership, operation and control by their borrowers. While we believe the financing program provided in the bill is financially sound and generally consistent with meeting program objectives and progressively freeing REA-financed systems from complete dependence on Federal financing, we suggest the following changes be made in the bill in the interest of achieving these goals: First, we recommend the deletion of section 408 (d) which denies section 4 2-percent loans to borrowers with net worth exceeding 40 percent during the preceding year except where certain listed conditions exist. Net worth is not, in and of itself, a proper measure of ability to pay a given rate of interest. Considerations of sound administrative practice and the need for flexibility in the exercise of the loan discretion, which has historically always been an essential element of the rural electrification program and one of the basic ingredients of its success, dictate that the determination of continued eligibility for 2percent financing continue to be entrusted to administrative discretion and determined through the loan feasibility procedures which have been developed and so successfully employed in the program. It is further to be noted that this provision is inconsistent with the declaration of policy in section 1 of H.R. 1400 that "nothing in this Act shall be construed to change the loan purposes, terms, and conditions authorized in titles I and II." Second, we feel that the provision in section 405 (j) (2) for judicial review of electric bank board decisions affords unwarranted opportunities for obstruction and delay of the orderly conduct of borrowers' programs. The provision abrogates a line of decisions of long-standing which deny standing to sue in just such circumstances. By placing new impediments in the orderly development of optimum power supply arrangements, it runs counter to the purpose of freeing REA-financed systems from dependence on Government assistance. We therefore recommend deletion of the provision for judicial review. It would, in our opinion, strengthen the bill if, reflecting the substantial Government involvement in the banks, Federal control were continued until all Government-owned stock is retired and Treasury backup of bank debentures terminated. Consistently with this view, we recommend that the banks be defined as "wholly owned Government corporations" until complete retirement of the Government investment is accomplished. This would require the submission of annual budgets to the Congress and Congressional action thereon in addition to audits by the General Accounting Office and audit reports to the Congress by the Comptroller General. We accordingly recommend the following amendments of H.R. 1400: Page 7, line 16, section 402, change the period to a semicolon, and insert thereafter "Provided, that the electric bank shall undertake no new types of activities not included in the annual budget programs." Page 34, line 9, section 602, change the period to a semicolon, and insert thereafter "Provided, that the telephone bank shall undertake no new types of activities not included in the annual budget programs." Page 8, lines, 11-18, section 403, strike subsection (c) and insert in lieu thereof "(c) the electric bank shall be subject to the provisions of the Government Corporation Control Act, as amended (31 U.S.C. 841, et seq.), in the same manner and to the same extent as if it were included in the definition of 'wholly owned Government corporation' as set forth in section 101 of said Act (31 U.S.C. 846);" Page 35, lines 3-10, section 603, strike subsection (c) and insert in lieu thereof "(c) the telephone bank shall be subject to the provisions of the Government Corporation Control Act, as amended (31 U.S.C. 841, et seq.), in the same manner and to the same extent as if it were included in the definition of 'Wholly owned Government corporation' as set forth in section 101 of said Act (31 U.S.C. 846);" Page 19, line 20, section 407(a) and page 43, line 20, insert before the semicolon-"with the approval of the Secretary of the Treasury". Page 19, line 24, section 407 (a), and on page 43, line 23, section 607 (a), change the period to a comma and insert thereafter-"unles an appropriation Act shall specify another amount, and it shall be in order for appropriation Acts to contain such provisions subject to the aforesaid limitations." 19 Page 27, section 410, strike lines 7-15 of subsection (a) and insert in lieu thereof "(a) Whenever Class A stock issued to the United States has been fully redeemed and retired pursuant to section 406 (c) of this title, and if there shall then be no outstanding indebtedness of the electric bank to the Secretary of the Treasury on notes issued pursuant to section 407 (b)—” Page 28, line 5, section 410 (a) (2), insert after the word "bank" "Provided, that board members elected under the provisions of section 405 (e) shall be subject to the approval of the President" Page 50, line 16, section 610 (a) (2), insert after the word "bank" "Provided, that board members elected under the provisions of section 605(e) shall be subject to the approval of the President" Page 28, line 12, section 410 (a)(3), strike the word "and" and insert after the semicolon— "Provided, that at least 18 months prior to the estimated date for conversion to non-Federal ownership, the Secretary shall transmit to the Congress a report and proposed legislation containing recommendations as to the permanent supervisory functions which should continue to be exercised on behalf of the United States with respect to the electric bank;" Page 50, line 23, section 610(a) (3), strike the word "and" and insert after the semicolon "Provided, that at least 19 months prior to the estimated date for conversion to non-Federal ownership, the Secretary shall transmit to the Congress a report and proposed legislation containing recommendations as to the permanent supervisory functions which should continue to be exercised on behalf of the United States with respect to the telephone bank;" Page 28, line 17, strike the period and insert in lieu thereof a semicolon and the word "and". Page 28, lines 18-21, section 410, strike subsection (b) and insert in lieu thereof "(5) loans made by the electric bank shall not be subject to the restrictions prescribed in section 405 (j) and in the provisos to section 408 (a) (2).” Page 28, line 22, change the letter "(c)" to "(b)". Page 49, section 610, strike lines 19 to 25 in subsection (a) and insert in lieu thereof "(a) Whenever Class A stock issued to the United States has been fully redeemed and retired pursuant to section 606 (c) of this title, and if there shall then be no out-" Page 51, line 3, strike the period and insert in lieu thereof a semicolon and the word "and". Page 51, lines 4-7, section 610, strike subsection (b) and insert in lieu thereof"(5) loans made by the telephone bank shall not be subject to the restrictions prescribed in the provisos to subsection 608(a) (2).” Page 51, line 8, change the letter "(c)" to "(b)". Page 52, strike sections 4 and 5 and renumber section 6 to read "SEC. 4". We also recommend that there be substituted for the franchise tax provision a provision for the payment of a proportionate share of the net earnings as dividends on Class A stock. This would be accomplished by substituting the following for sections 406 (h) and 606 (f) — "SEC. 406 (h) After payment of all operating expenses of the electric bank, including interest and dividends on class C and class D stock, setting aside appropriate funds for reserves for losses, and making payments in lieu of taxes, the Electric Bank Board shall annually set aside the remaining earnings of the electric bank for the payment of dividends on class A stock and patronage refunds. Such remaining earnings shall be divided at the time they are set aside in proportion to the total amount of outstanding class A and class B stock at such time. The proportion available for the payment of patronage refunds shall be distributed in accordance with the bylaws of the Electric Bank Board. At the time of such distribution, the proportion available for the payment of dividends on class A stock shall be paid into miscellaneous receipts of the Treasury." "SEC. 606 (f) After payment of all operating expenses of the telephone bank, including interest and dividends on class C stock, setting aside appropriate funds for reserves for losses, and making payments in lieu of taxes, the Telephone Bank Board shall annually set aside the remaining earnings of the telephone bank for the payment of dividends on class A stock and patronage refunds. Such remaining |